10-Q 1 efh-9302012x10q.htm FORM 10-Q EFH-9.30.2012-10Q
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 


FORM 10-Q


x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012

— OR —

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission File Number 1-12833


Energy Future Holdings Corp.

(Exact name of registrant as specified in its charter)

Texas
 
75-2669310
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1601 Bryan Street, Dallas, TX 75201-3411
 
(214) 812-4600
(Address of principal executive offices) (Zip Code)
 
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes x    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o  Accelerated filer o  Non-Accelerated filer x (Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o No x

At October 29, 2012, there were 1,680,539,245 shares of common stock, without par value, outstanding of Energy Future Holdings Corp. (substantially all of which were owned by Texas Energy Future Holdings Limited Partnership, Energy Future Holdings Corp.’s parent holding company, and none of which is publicly traded).
 




TABLE OF CONTENTS
 
 
PAGE
GLOSSARY
 
PART I.
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
 
Item 1.
Item 1A.
Item 4.
Item 5.
Item 6.
 

Energy Future Holdings Corp.'s (EFH Corp.) annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are made available to the public, free of charge, on the EFH Corp. website at http://www.energyfutureholdings.com, as soon as reasonably practicable after they have been filed with or furnished to the Securities and Exchange Commission. The information on EFH Corp.'s website shall not be deemed a part of, or incorporated by reference into, this quarterly report on Form 10-Q. The representations and warranties contained in any agreement that we have filed as an exhibit to this quarterly report on Form 10-Q or that we have or may publicly file in the future may contain representations and warranties made by and to the parties thereto at specific dates. Such representations and warranties may be subject to exceptions and qualifications contained in separate disclosure schedules, may represent the parties' risk allocation in the particular transaction, or may be qualified by materiality standards that differ from what may be viewed as material for securities law purposes.

This quarterly report on Form 10-Q and other Securities and Exchange Commission filings of EFH Corp. and its subsidiaries occasionally make references to EFH Corp. (or "we," "our," "us" or "the company"), EFCH, EFIH, TCEH, TXU Energy, Luminant, Oncor Holdings or Oncor when describing actions, rights or obligations of their respective subsidiaries. These references reflect the fact that the subsidiaries are consolidated with, or otherwise reflected in, their respective parent company's financial statements for financial reporting purposes. However, these references should not be interpreted to imply that the parent company is actually undertaking the action or has the rights or obligations of the relevant subsidiary company or vice versa.


i


GLOSSARY

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.
2011 Form 10-K
 
EFH Corp.’s Annual Report on Form 10-K for the year ended December 31, 2011
 
 
 
Adjusted EBITDA
 
Adjusted EBITDA means EBITDA adjusted to exclude noncash items, unusual items and other adjustments allowable under certain of our debt arrangements. See the definition of EBITDA below. Adjusted EBITDA and EBITDA are not recognized terms under US GAAP and, thus, are non-GAAP financial measures. We are providing Adjusted EBITDA in this Form 10-Q (see reconciliations in Exhibits 99(b), 99(c) and 99(d)) solely because of the important role that Adjusted EBITDA plays in respect of certain covenants contained in our debt arrangements. We do not intend for Adjusted EBITDA (or EBITDA) to be an alternative to net income as a measure of operating performance or an alternative to cash flows from operating activities as a measure of liquidity or an alternative to any other measure of financial performance presented in accordance with US GAAP. Additionally, we do not intend for Adjusted EBITDA (or EBITDA) to be used as a measure of free cash flow available for management's discretionary use, as the measure excludes certain cash requirements such as interest payments, tax payments and other debt service requirements. Because not all companies use identical calculations, our presentation of Adjusted EBITDA (and EBITDA) may not be comparable to similarly titled measures of other companies.
 
 
 
CAIR
 
Clean Air Interstate Rule
 
 
 
Competitive Electric segment
 
the EFH Corp. business segment that consists principally of TCEH
 
 
 
CREZ
 
Competitive Renewable Energy Zone
 
 
 
CSAPR
 
the final Cross-State Air Pollution Rule issued by the EPA in July 2011 and vacated by the US Court of Appeals for the District of Columbia Circuit in August 2012 (see Note 7 to Financial Statements)
 
 
 
EBITDA
 
earnings (net income) before interest expense, income taxes, depreciation and amortization
 
 
 
EFCH
 
Energy Future Competitive Holdings Company, a direct, wholly-owned subsidiary of EFH Corp. and the direct parent of TCEH, and/or its subsidiaries, depending on context
 
 
 
EFH Corp.
 
Energy Future Holdings Corp., a holding company, and/or its subsidiaries, depending on context, whose major subsidiaries include TCEH and Oncor
 
 
 
EFH Corp. Senior Notes
 
Refers, collectively, to EFH Corp.'s 10.875% Senior Notes due November 1, 2017 (EFH Corp. 10.875% Notes) and EFH Corp.'s 11.25%/12.00% Senior Toggle Notes due November 1, 2017 (EFH Corp. Toggle Notes).
 
 
 
EFH Corp. Senior Secured Notes
 
Refers, collectively, to EFH Corp.'s 9.75% Senior Secured Notes due October 15, 2019 (EFH Corp. 9.75% Notes) and EFH Corp.'s 10.000% Senior Secured Notes due January 15, 2020 (EFH Corp. 10% Notes).
 
 
 
EFIH
 
Energy Future Intermediate Holding Company LLC, a direct, wholly-owned subsidiary of EFH Corp. and the direct parent of Oncor Holdings
 
 
 
EFIH Finance
 
EFIH Finance Inc., a direct, wholly-owned subsidiary of EFIH, formed for the sole purpose of serving as co-issuer with EFIH of certain debt securities
 
 
 
EFIH Notes
 
Refers, collectively, to EFIH's and EFIH Finance's 6.875% Senior Secured Notes due August 15, 2017 (EFIH 6.875% Notes), 9.75% Senior Secured Notes due October 15, 2019 (EFIH 9.75% Notes), 10.000% Senior Secured Notes due December 1, 2020 (EFIH 10% Notes), 11% Senior Secured Second Lien Notes due October 1, 2021 (EFIH 11% Notes) and 11.75% Senior Secured Second Lien Notes due March 1, 2022 (EFIH 11.75% Notes).
 
 
 
EPA
 
US Environmental Protection Agency
 
 
 
ERCOT
 
Electric Reliability Council of Texas, Inc., the independent system operator and the regional coordinator of various electricity systems within Texas
 
 
 
GAAP
 
generally accepted accounting principles
 
 
 
GWh
 
gigawatt-hours
 
 
 
kWh
 
kilowatt-hours
 
 
 

ii


LIBOR
 
London Interbank Offered Rate, an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market
 
 
 
Luminant
 
subsidiaries of TCEH engaged in competitive market activities consisting of electricity generation and wholesale energy sales and purchases as well as commodity risk management and trading activities, all largely in Texas
 
 
 
market heat rate
 
Heat rate is a measure of the efficiency of converting a fuel source to electricity. Market heat rate is the implied relationship between wholesale electricity prices and natural gas prices and is calculated by dividing the wholesale market price of electricity, which is based on the price offer of the marginal supplier in ERCOT (generally natural gas plants), by the market price of natural gas. Forward wholesale electricity market price quotes in ERCOT are generally limited to two or three years; accordingly, forward market heat rates are generally limited to the same time period. Forecasted market heat rates for time periods for which market price quotes are not available are based on fundamental economic factors and forecasts, including electricity supply, demand growth, capital costs associated with new construction of generation supply, transmission development and other factors.
 
 
 
MATS
 
the Mercury and Air Toxics Standard finalized by the EPA in December 2011 and published in February 2012
 
 
 
Merger
 
The transaction referred to in the Agreement and Plan of Merger, dated February 25, 2007, under which Texas Holdings agreed to acquire EFH Corp., which was completed on October 10, 2007.
 
 
 
MMBtu
 
million British thermal units
 
 
 
Moody's
 
Moody's Investors Services, Inc. (a credit rating agency)
 
 
 
MW
 
megawatts
 
 
 
MWh
 
megawatt-hours
 
 
 
NERC
 
North American Electric Reliability Corporation
 
 
 
NOx
 
nitrogen oxides
 
 
 
NRC
 
US Nuclear Regulatory Commission
 
 
 
NYMEX
 
the New York Mercantile Exchange, a physical commodity futures exchange
 
 
 
Oncor
 
Oncor Electric Delivery Company LLC, a direct, majority-owned subsidiary of Oncor Holdings and an indirect subsidiary of EFH Corp., and/or its consolidated bankruptcy-remote financing subsidiary, Oncor Electric Delivery Transition Bond Company LLC, depending on context, that is engaged in regulated electricity transmission and distribution activities
 
 
 
Oncor Holdings
 
Oncor Electric Delivery Holdings Company LLC, a direct, wholly-owned subsidiary of EFIH and the direct majority owner of Oncor, and/or its subsidiaries, depending on context
 
 
 
Oncor Ring-Fenced Entities
 
Oncor Holdings and its direct and indirect subsidiaries, including Oncor
 
 
 
OPEB
 
other postretirement employee benefits
 
 
 
PUCT
 
Public Utility Commission of Texas
 
 
 
purchase accounting
 
The purchase method of accounting for a business combination as prescribed by US GAAP, whereby the cost or "purchase price" of a business combination, including the amount paid for the equity and direct transaction costs are allocated to identifiable assets and liabilities (including intangible assets) based upon their fair values. The excess of the purchase price over the fair values of assets and liabilities is recorded as goodwill.
 
 
 
Regulated Delivery segment
 
the EFH Corp. business segment that consists primarily of our investment in Oncor
 
 
 
REP
 
retail electric provider
 
 
 
RRC
 
Railroad Commission of Texas, which among other things, has oversight of lignite mining activity in Texas
 
 
 
S&P
 
Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies Inc. (a credit rating agency)
 
 
 
SEC
 
US Securities and Exchange Commission

iii


 
 
 
Securities Act
 
Securities Act of 1933, as amended
 
 
 
SG&A
 
selling, general and administrative
 
 
 
SO2
 
sulfur dioxide
 
 
 
Sponsor Group
 
Refers, collectively, to certain investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P., TPG Management, L.P. and GS Capital Partners, an affiliate of Goldman, Sachs & Co., that have an ownership interest in Texas Holdings.
 
 
 
TCEH
 
Texas Competitive Electric Holdings Company LLC, a direct, wholly-owned subsidiary of EFCH and an indirect subsidiary of EFH Corp., and/or its subsidiaries, depending on context, that are engaged in electricity generation and wholesale and retail energy markets activities, and whose major subsidiaries include Luminant and TXU Energy
 
 
 
TCEH Finance
 
TCEH Finance, Inc., a direct, wholly-owned subsidiary of TCEH, formed for the sole purpose of serving as co-issuer with TCEH of certain debt securities
 
 
 
TCEH Senior Notes
 
Refers, collectively, to TCEH's and TCEH Finance's 10.25% Senior Notes due November 1, 2015 and 10.25% Senior Notes due November 1, 2015, Series B (collectively, TCEH 10.25% Notes) and TCEH's and TCEH Finance's 10.50%/11.25% Senior Toggle Notes due November 1, 2016 (TCEH Toggle Notes).
 
 
 
TCEH Senior Secured Facilities
 
Refers, collectively, to the TCEH Term Loan Facilities, TCEH Revolving Credit Facility, TCEH Letter of Credit Facility and TCEH Commodity Collateral Posting Facility. See Note 6 to Financial Statements for details of these facilities.
 
 
 
TCEH Senior Secured Notes
 
TCEH's and TCEH Finance's 11.5% Senior Secured Notes due October 1, 2020
 
 
 
TCEH Senior Secured Second Lien Notes
 
Refers, collectively, to TCEH's and TCEH Finance's 15% Senior Secured Second Lien Notes due April 1, 2021 and TCEH's and TCEH Finance's 15% Senior Secured Second Lien Notes due April 1, 2021, Series B.
 
 
 
TCEQ
 
Texas Commission on Environmental Quality
 
 
 
Texas Holdings
 
Texas Energy Future Holdings Limited Partnership, a limited partnership controlled by the Sponsor Group, that owns substantially all of the common stock of EFH Corp.
 
 
 
Texas Holdings Group
 
Texas Holdings and its direct and indirect subsidiaries other than the Oncor Ring-Fenced Entities
 
 
 
Texas Transmission
 
Texas Transmission Investment LLC, a limited liability company that owns a 19.75% equity interest in Oncor and is not affiliated with EFH Corp., any of its subsidiaries or any member of the Sponsor Group
 
 
 
TRE
 
Texas Reliability Entity, Inc., an independent organization that develops reliability standards for the ERCOT region and monitors and enforces compliance with NERC standards and ERCOT protocols
 
 
 
TXU Energy
 
TXU Energy Retail Company LLC, a direct, wholly-owned subsidiary of TCEH that is a REP in competitive areas of ERCOT and is engaged in the retail sale of electricity to residential and business customers
 
 
 
US
 
United States of America
 
 
 
VIE
 
variable interest entity


iv


PART I. FINANCIAL INFORMATION

Item 1.
FINANCIAL STATEMENTS

ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(millions of dollars)
Operating revenues
$
1,752

 
$
2,321

 
$
4,358

 
$
5,672

Fuel, purchased power costs and delivery fees
(850
)
 
(1,058
)
 
(2,153
)
 
(2,726
)
Net gain (loss) from commodity hedging and trading activities
(3
)
 
270

 
229

 
365

Operating costs
(201
)
 
(207
)
 
(636
)
 
(670
)
Depreciation and amortization
(335
)
 
(379
)
 
(1,015
)
 
(1,119
)
Selling, general and administrative expenses
(177
)
 
(195
)
 
(491
)
 
(537
)
Franchise and revenue-based taxes
(19
)
 
(21
)
 
(55
)
 
(64
)
Other income (Note 14)
6

 
9

 
25

 
84

Other deductions (Note 14)
(42
)
 
(483
)
 
(54
)
 
(593
)
Interest income
1

 

 
2

 
2

Interest expense and related charges (Note 14)
(944
)
 
(1,523
)
 
(2,746
)
 
(3,467
)
Loss before income taxes and equity in earnings of unconsolidated subsidiaries
(812
)
 
(1,266
)
 
(2,536
)
 
(3,053
)
Income tax benefit
296

 
443

 
879

 
1,042

Equity in earnings of unconsolidated subsidiaries (net of tax) (Note 2)
109

 
113

 
249

 
235

Net loss
$
(407
)
 
$
(710
)
 
$
(1,408
)
 
$
(1,776
)

See Notes to Financial Statements.

1



ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(millions of dollars)
Net loss
$
(407
)
 
$
(710
)
 
$
(1,408
)
 
$
(1,776
)
Other comprehensive income (loss), net of tax effects:
 
 
 
 
 
 
 
Effects related to pension and other retirement benefit obligations (net of tax (expense) benefit of $18, $(2), $13 and $(8)) (Note 11)
(33
)
 
5

 
(25
)
 
16

Cash flow hedges — Net decrease in fair value of derivatives held by unconsolidated subsidiary (net of tax benefit of $—, $13, $— and $13)

 
(24
)
 

 
(24
)
Cash flow hedges derivative value net loss related to hedged transactions recognized during the period and reported in:
 
 
 
 
 
 
 
Net loss (net of tax benefit of $1, $2, $3 and $9)
1

 
4

 
5

 
15

Equity in earnings of unconsolidated subsidiaries (net of tax benefit of $—, $—, $1 and $—)
1

 

 
2

 

Total other comprehensive income (loss)
(31
)
 
(15
)
 
(18
)
 
7

Comprehensive loss
$
(438
)
 
$
(725
)
 
$
(1,426
)
 
$
(1,769
)

See Notes to Financial Statements.

2


ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
 
Nine Months Ended September 30,
 
2012
 
2011
 
(millions of dollars)
Cash flows — operating activities:
 
 
 
Net loss
$
(1,408
)
 
$
(1,776
)
Adjustments to reconcile net loss to cash provided by operating activities:
 
 
 
Depreciation and amortization
1,161

 
1,313

Deferred income tax benefit, net
(887
)
 
(1,128
)
Unrealized net loss from mark-to-market valuations of commodity positions
1,290

 
247

Unrealized net loss from mark-to-market valuations of interest rate swaps (Note 6)
12

 
879

Interest expense on toggle notes payable in additional principal (Notes 6 and 14)
177

 
163

Amortization of debt related costs, discounts, fair value discounts and losses on dedesignated cash flow hedges (Note 14)
183

 
203

Equity in earnings of unconsolidated subsidiaries
(249
)
 
(235
)
Distributions of earnings from unconsolidated subsidiaries
100

 
64

Impairment of emissions allowances intangible assets (Note 14)

 
418

Severance charges (Note 14)

 
49

Other asset impairments (Note 14)
31

 
9

Third-party fees related to debt amendment and extension (Note 14) (reported as financing)

 
100

Debt extinguishment gains (Note 6)

 
(25
)
Bad debt expense (Note 5)
20

 
42

Accretion expense related primarily to mining reclamation obligations (Note 14)
27

 
36

Stock-based incentive compensation expense
10

 
8

Other, net
3

 
(7
)
Changes in operating assets and liabilities:
 
 
 
Margin deposits, net
(321
)
 
277

Other operating assets and liabilities
(51
)
 
100

Cash provided by operating activities
98

 
737

Cash flows — financing activities:
 
 
 
Issuances of long-term debt (Note 6)
2,000

 
1,750

Repayments/repurchases of long-term debt (Note 6)
(31
)
 
(987
)
Net short-term borrowings under accounts receivable securitization program (Note 5)
80

 
115

Decrease in other short-term borrowings (Note 6)
(385
)
 
(1,126
)
Decrease in note payable to unconsolidated subsidiary (Note 12)
(20
)
 
(28
)
Settlement of agreements with unconsolidated affiliate (Note 12)
(159
)
 

Sale/leaseback of equipment
15

 

Contributions from noncontrolling interests
6

 
13

Debt amendment, exchange and issuance costs and discounts, including third-party fees expensed
(43
)
 
(857
)
Other, net

 
(2
)
Cash provided by (used in) financing activities
1,463

 
(1,122
)

3


 
Nine Months Ended September 30,
 
2012
 
2011
 
(millions of dollars)
Cash flows — investing activities:
 
 
 
Capital expenditures
(526
)
 
(374
)
Nuclear fuel purchases
(155
)
 
(125
)
Proceeds from sales of assets
1

 
53

Restricted cash related to debt issuance (Note 6)
(680
)
 

Reduction of restricted cash related to TCEH Letter of Credit Facility

 
188

Other changes in restricted cash
112

 
(50
)
Proceeds from sales of environmental allowances and credits

 
2

Purchases of environmental allowances and credits
(19
)
 
(12
)
Proceeds from sales of nuclear decommissioning trust fund securities
56

 
2,385

Investments in nuclear decommissioning trust fund securities
(68
)
 
(2,398
)
Other, net
4

 
20

Cash used in investing activities
(1,275
)
 
(311
)
 
 
 
 
Net change in cash and cash equivalents
286

 
(696
)
Cash and cash equivalents — beginning balance
826

 
1,534

Cash and cash equivalents — ending balance
$
1,112

 
$
838


See Notes to Financial Statements.

4


ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30,
2012
 
December 31,
2011
 
(millions of dollars)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,112

 
$
826

Restricted cash (Note 14)
697

 
129

Trade accounts receivable — net (includes $594 and $524 in pledged amounts related to a VIE (Notes 3 and 5))
823

 
767

Inventories (Note 14)
407

 
418

Commodity and other derivative contractual assets (Note 10)
1,825

 
3,025

Margin deposits related to commodity positions
73

 
56

Other current assets
68

 
82

Total current assets
5,005

 
5,303

Restricted cash (Note 14)
947

 
947

Receivable from unconsolidated subsidiary (Note 12)
1,332

 
1,235

Investment in unconsolidated subsidiary (Note 2)
5,870

 
5,720

Other investments (Note 14)
781

 
709

Property, plant and equipment — net (Note 14)
18,874

 
19,427

Goodwill (Note 4)
6,152

 
6,152

Identifiable intangible assets — net (Note 4)
1,777

 
1,845

Commodity and other derivative contractual assets (Note 10)
852

 
1,552

Other noncurrent assets, primarily unamortized debt amendment and issuance costs
1,145

 
1,187

Total assets
$
42,735

 
$
44,077

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term borrowings (includes $184 and $104 related to a VIE (Notes 3 and 6))
$
469

 
$
774

Long-term debt due currently (Note 6)
104

 
47

Trade accounts payable
437

 
574

Payables due to unconsolidated subsidiary (Note 12)
137

 
177

Commodity and other derivative contractual liabilities (Note 10)
1,313

 
1,950

Margin deposits related to commodity positions
757

 
1,061

Accumulated deferred income taxes
40

 
54

Accrued interest
734

 
480

Other current liabilities
391

 
497

Total current liabilities
4,382

 
5,614

Accumulated deferred income taxes
3,101

 
3,989

Commodity and other derivative contractual liabilities (Note 10)
1,767

 
1,692

Notes or other liabilities due to unconsolidated subsidiary (Note 12)
286

 
363

Long-term debt, less amounts due currently (Note 6)
37,428

 
35,360

Other noncurrent liabilities and deferred credits (Note 14)
4,937

 
4,816

Total liabilities
51,901

 
51,834

Commitments and Contingencies (Note 7)


 


Equity (Note 8):
 
 
 
EFH Corp. shareholders' equity
(9,267
)
 
(7,852
)
Noncontrolling interests in subsidiaries
101

 
95

Total equity
(9,166
)
 
(7,757
)
Total liabilities and equity
$
42,735

 
$
44,077


See Notes to Financial Statements.


5


ENERGY FUTURE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business

References in this report to "we," "our," "us" and "the company" are to EFH Corp. and/or its subsidiaries, as apparent in the context. See "Glossary" for defined terms.

EFH Corp., a Texas corporation, is a Dallas-based holding company that conducts its operations principally through its TCEH and Oncor subsidiaries. EFH Corp. is a subsidiary of Texas Holdings, which is controlled by the Sponsor Group. EFCH and its direct subsidiary, TCEH, are wholly-owned. TCEH is a holding company for subsidiaries engaged in competitive electricity market activities largely in Texas, including electricity generation, wholesale energy sales and purchases, commodity risk management and trading activities, and retail electricity sales. EFIH is wholly-owned and indirectly holds an approximately 80% equity interest in Oncor. Oncor is engaged in regulated electricity transmission and distribution operations in Texas. Oncor provides distribution services to REPs, including subsidiaries of TCEH, which sell electricity to residential, business and other consumers. Oncor (and its majority owner, Oncor Holdings) are not consolidated in EFH Corp.'s financial statements in accordance with consolidation accounting standards related to variable interest entities (VIEs) (see Note 3).

TCEH operates largely in the ERCOT market, and wholesale electricity prices in that market have generally moved with the price of natural gas. Wholesale electricity prices have significant implications to its profitability and cash flows and, accordingly, the value of its business.

Various "ring-fencing" measures have been taken to enhance the credit quality of Oncor. Such measures include, among other things: the sale of a 19.75% equity interest in Oncor to Texas Transmission in November 2008; maintenance of separate books and records for the Oncor Ring-Fenced Entities; Oncor's board of directors being comprised of a majority of independent directors, and prohibitions on the Oncor Ring-Fenced Entities providing credit support to, or receiving credit support from, any member of the Texas Holdings Group. The assets and liabilities of the Oncor Ring-Fenced Entities are separate and distinct from those of the Texas Holdings Group, and none of the assets of the Oncor Ring-Fenced Entities are available to satisfy the debt or contractual obligations of any member of the Texas Holdings Group. Moreover, Oncor's operations are conducted, and its cash flows managed, independently from the Texas Holdings Group.

We have two reportable segments: the Competitive Electric segment, consisting largely of TCEH, and the Regulated Delivery segment, consisting largely of our investment in Oncor. See Note 13 for further information concerning reportable business segments.

Basis of Presentation

The condensed consolidated financial statements have been prepared in accordance with US GAAP and on the same basis as the audited financial statements included in our 2011 Form 10-K. Investments in unconsolidated subsidiaries, which are 50% or less owned and/or do not meet accounting standards criteria for consolidation, are accounted for under the equity method (see Notes 2 and 3). Adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations and financial position have been included therein. All intercompany items and transactions have been eliminated in consolidation. Any acquisitions of outstanding debt for cash, including notes that had been issued in lieu of cash interest, are presented in the financing activities section of the statement of cash flows. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with US GAAP have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and footnotes required by US GAAP, they should be read in conjunction with the audited financial statements and related notes included in our 2011 Form 10-K. The results of operations for an interim period may not give a true indication of results for a full year. All dollar amounts in the financial statements and tables in the notes are stated in millions of US dollars unless otherwise indicated.

Use of Estimates

Preparation of financial statements requires estimates and assumptions about future events that affect the reporting of assets and liabilities at the balance sheet dates and the reported amounts of revenue and expense, including fair value measurements. In the event estimates and/or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information.

6



2.
EQUITY METHOD INVESTMENTS

Oncor Holdings

Investment in unconsolidated subsidiary totaled $5.870 billion and $5.720 billion at September 30, 2012 and December 31, 2011, respectively, and consists of our interest in Oncor Holdings (100% owned), which we account for under the equity method (see Note 3). Oncor Holdings owns approximately 80% of Oncor, which is engaged in regulated electricity transmission and distribution operations in Texas. Oncor provides services, principally electricity distribution, to TCEH's retail operations, and the related revenues represented 29% and 34% of Oncor Holdings' consolidated operating revenues in the nine months ended September 30, 2012 and 2011, respectively.

See Note 12 for discussion of Oncor Holdings' and Oncor's transactions with EFH Corp. and its other subsidiaries.

Distributions from Oncor Holdings Oncor Holdings' distributions of earnings to us totaled $100 million and $64 million in the nine months ended September 30, 2012 and 2011, respectively. Distributions are limited to Oncor's cumulative net income and may not be paid except to the extent Oncor maintains a required regulatory capital structure, as discussed below. At September 30, 2012, $218 million was eligible to be distributed to Oncor's members after taking into account these restrictions, of which approximately 80% relates to our ownership interest in Oncor. The boards of directors of each of Oncor and Oncor Holdings can withhold distributions to the extent the applicable board determines in good faith that it is necessary to retain such amounts to meet expected future requirements of Oncor and/or Oncor Holdings.

For the period beginning October 11, 2007 and ending December 31, 2012, distributions (other than distributions of the proceeds of any equity issuance) paid by Oncor to its members are limited by a PUCT order to an amount not to exceed Oncor's cumulative net income determined in accordance with US GAAP, as adjusted. Adjustments consist of the removal of noncash impacts of purchase accounting and deducting two specific cash commitments. To date, the noncash impacts consist of removing the effect of an $860 million goodwill impairment charge in 2008 and the cumulative amount of net accretion of fair value adjustments. The two specific cash commitments are the $72 million ($46 million after tax) one-time refund to customers in September 2008 and the funds spent as part of the $100 million commitment for additional energy efficiency initiatives of which $94 million ($61 million after tax) has been spent through September 30, 2012. At September 30, 2012, $468 million was available for distribution under the cumulative net income restriction, of which approximately 80% relates to our ownership interest in Oncor.

Oncor's distributions are further limited by its regulatory capital structure, which is required to be at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity. At September 30, 2012, Oncor's regulatory capitalization ratio was 58.5% debt and 41.5% equity. The PUCT has the authority to determine what types of debt and equity are included in a utility's debt-to-equity ratio. For purposes of this ratio, debt is calculated as long-term debt plus unamortized gains on reacquired debt less unamortized issuance expenses, premiums and losses on reacquired debt. The debt calculation excludes bonds issued by Oncor Electric Delivery Transition Bond Company, which were issued in 2003 and 2004 to recover specific generation-related regulatory asset stranded and other qualified costs. Equity is calculated as membership interests determined in accordance with US GAAP, excluding the effects of accounting for the Merger (which included recording the initial goodwill and fair value adjustments and the subsequent related impairments and amortization). At September 30, 2012, $218 million was available for distribution under the capital structure restriction, of which approximately 80% relates to our ownership interest in Oncor.

In addition to distributions of earnings, under a tax sharing agreement we received income tax payments from Oncor and Oncor Holdings totaling $27 million and paid income tax net refunds to Oncor and Oncor Holdings totaling $89 million in the nine months ended September 30, 2012 and 2011, respectively (see Note 12).


7


Oncor Holdings Financial Statements Condensed statements of consolidated income of Oncor Holdings and its subsidiaries in the three and nine months ended September 30, 2012 and 2011 are presented below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Operating revenues
$
925

 
$
897

 
$
2,536

 
$
2,359

Operation and maintenance expenses
(292
)
 
(281
)
 
(873
)
 
(799
)
Depreciation and amortization
(201
)
 
(190
)
 
(577
)
 
(540
)
Taxes other than income taxes
(113
)
 
(107
)
 
(313
)
 
(297
)
Other income
6

 
8

 
20

 
23

Other deductions
(1
)
 
(2
)
 
(4
)
 
(7
)
Interest income
3

 
7

 
24

 
25

Interest expense and related charges
(96
)
 
(89
)
 
(279
)
 
(265
)
Income before income taxes
231

 
243

 
534

 
499

Income tax expense
(95
)
 
(101
)
 
(221
)
 
(204
)
Net income
136

 
142

 
313

 
295

Net income attributable to noncontrolling interests
(27
)
 
(29
)
 
(64
)
 
(60
)
Net income attributable to Oncor Holdings
$
109

 
$
113

 
$
249

 
$
235



8


Assets and liabilities of Oncor Holdings at September 30, 2012 and December 31, 2011 are presented below:
 
September 30,
2012
 
December 31, 2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
9

 
$
12

Restricted cash
64

 
57

Trade accounts receivable — net
375

 
303

Trade accounts and other receivables from affiliates
154

 
179

Inventories
72

 
71

Accumulated deferred income taxes
39

 
73

Prepayments and other current assets
74

 
74

Total current assets
787

 
769

Restricted cash
16

 
16

Receivable from TCEH related to nuclear plant decommissioning
286

 
225

Other investments
78

 
73

Property, plant and equipment — net
11,191

 
10,569

Goodwill
4,064

 
4,064

Note receivable due from TCEH

 
138

Regulatory assets — net
1,542

 
1,505

Other noncurrent assets
77

 
73

Total assets
$
18,041

 
$
17,432

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Short-term borrowings
$
784

 
$
392

Long-term debt due currently
123

 
494

Trade accounts payable — nonaffiliates
111

 
197

Income taxes payable to EFH Corp.
17

 
2

Accrued taxes other than income
130

 
151

Accrued interest
91

 
108

Other current liabilities
110

 
112

Total current liabilities
1,366

 
1,456

Accumulated deferred income taxes
1,750

 
1,688

Investment tax credits
25

 
28

Long-term debt, less amounts due currently
5,440

 
5,144

Other noncurrent liabilities and deferred credits
1,944

 
1,832

Total liabilities
$
10,525

 
$
10,148


9



3.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES

A variable interest entity (VIE) is an entity with which we have a relationship or arrangement that indicates some level of control over the entity or results in economic risks to us. Accounting standards require consolidation of a VIE if we have (a) the power to direct the significant activities of the VIE and (b) the right or obligation to absorb profit and loss from the VIE (primary beneficiary). Our VIEs consist of equity investments in certain of our subsidiaries. In determining the appropriateness of consolidation of a VIE, we evaluate its purpose, governance structure, decision making processes and risks that are passed on to its interest holders. We also examine the nature of any related party relationships among the interest holders of the VIE and the nature of any special rights granted to the interest holders of the VIE.

As discussed below, our balance sheet includes assets and liabilities of VIEs that meet the consolidation standards. Oncor Holdings, an indirect EFH Corp. subsidiary which holds an approximate 80% interest in Oncor, is not consolidated in EFH Corp.'s financial statements, and instead is accounted for as an equity method investment, because the structural and operational "ring-fencing" measures discussed in Note 1 prevent us from having power to direct the significant activities of Oncor Holdings or Oncor. In accordance with accounting standards, we account for our investment in Oncor Holdings under the equity method, as opposed to the cost method, based on our level of influence over its activities. The maximum exposure to loss from our interests in VIEs does not exceed our carrying value. See Note 2 for additional information about equity method investments including condensed income statement and balance sheet data for Oncor Holdings.

Consolidated VIEs

See discussion in Note 5 regarding the VIE related to our accounts receivable securitization program that is consolidated under the accounting standards.

We also consolidate Comanche Peak Nuclear Power Company LLC (CPNPC), which was formed by subsidiaries of TCEH and Mitsubishi Heavy Industries Ltd. (MHI) for the purpose of developing two new nuclear generation units at our existing Comanche Peak nuclear-fueled generation facility using MHI's US-Advanced Pressurized Water Reactor technology and to obtain a combined operating license from the NRC. CPNPC is currently financed through capital contributions from the subsidiaries of TCEH and MHI that hold 88% and 12% of CPNPC's equity interests, respectively (see Note 8).

The carrying amounts and classifications of the assets and liabilities related to our consolidated VIEs are as follows:
Assets:
September 30,
2012
 
December 31, 2011
 
Liabilities:
September 30,
2012
 
December 31, 2011
Cash and cash equivalents
$
11

 
$
10

 
Short-term borrowings
$
184

 
$
104

Accounts receivable
594

 
525

 
Trade accounts payable
1

 
1

Property, plant and equipment
132

 
132

 
Other current liabilities
2

 
9

Other assets, including $2 million of current assets in both periods
6

 
6

 
 
 
 
 
Total assets
$
743

 
$
673

 
Total liabilities
$
187

 
$
114


The assets of our consolidated VIEs can only be used to settle the obligations of the VIE, and the creditors of our consolidated VIEs do not have recourse to our assets to settle the obligations of the VIE.

4.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

Goodwill

The following table provides the goodwill balances at September 30, 2012 and December 31, 2011, all of which relate to the Competitive Electric segment. There were no changes to the goodwill balances in the three and nine months ended September 30, 2012. None of the goodwill is being deducted for tax purposes.
Goodwill before impairment charges
$
18,342

Accumulated impairment charges
(12,190
)
Balance at September 30, 2012 and December 31, 2011
$
6,152


10


Identifiable Intangible Assets

Identifiable intangible assets reported in the balance sheet are comprised of the following:
 
 
September 30, 2012
 
December 31, 2011
Identifiable Intangible Asset
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Retail customer relationship
 
$
463

 
$
369

 
$
94

 
$
463

 
$
344

 
$
119

Favorable purchase and sales contracts
 
548

 
309

 
239

 
548

 
288

 
260

Capitalized in-service software
 
350

 
164

 
186

 
318

 
137

 
181

Environmental allowances and credits
 
596

 
393

 
203

 
582

 
375

 
207

Mining development costs
 
162

 
75

 
87

 
140

 
55

 
85

Total intangible assets subject to amortization
 
$
2,119

 
$
1,310

 
809

 
$
2,051

 
$
1,199

 
852

Trade name (not subject to amortization)
 
 
 
 
 
955

 
 
 
 
 
955

Mineral interests (not currently subject to amortization)(a)
 
 
 
 
 
13

 
 
 
 
 
38

Total intangible assets
 
 
 
 
 
$
1,777

 
 
 
 
 
$
1,845

____________
(a)
In September 2012, we recorded an impairment charge totaling $24 million related to certain mineral interests whose fair value declined as a result of lower expected natural gas drilling activity and prices. The impairment was based on a Level 3 valuation (see Note 9).

Amortization expense related to intangible assets (including income statement line item) consisted of:
Identifiable Intangible Asset
 
Income Statement Line
 
Segment
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
2012
 
2011
 
2012
 
2011
Retail customer relationship
 
Depreciation and amortization
 
Competitive Electric
 
$
8

 
$
13

 
$
25

 
$
39

Favorable purchase and sales contracts
 
Operating revenues/fuel, purchased power costs and delivery fees
 
Competitive Electric
 
5

 
6

 
20

 
23

Capitalized in-service software
 
Depreciation and amortization
 
All
 
10

 
11

 
29

 
31

Environmental allowances and credits
 
Fuel, purchased power costs and delivery fees
 
Competitive Electric
 
6

 
25

 
15

 
68

Mining development costs
 
Depreciation and amortization
 
Competitive Electric
 
7

 
13

 
20

 
19

Total amortization expense
 
 
 
 
 
$
36

 
$
68

 
$
109

 
$
180


See discussion in Note 14 regarding impairment of intangible assets in the third quarter 2011 as a result of the EPA's issuance of the CSAPR in July 2011.

Estimated Amortization of Intangible Assets The estimated aggregate amortization expense of intangible assets for each of the next five fiscal years is as follows:
Year
 
Estimated Amortization Expense
2012
 
$
154

2013
 
$
129

2014
 
$
112

2015
 
$
102

2016
 
$
84


11



5.
TRADE ACCOUNTS RECEIVABLE AND ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM

TCEH participates in an accounts receivable securitization program with financial institutions (the funding entities). Under the program, TXU Energy (originator) sells trade accounts receivable to TXU Receivables Company, which is an entity created for the special purpose of purchasing receivables from the originator and is a consolidated, wholly-owned, bankruptcy-remote, direct subsidiary of EFH Corp. TXU Receivables Company sells undivided interests in the purchased accounts receivable for cash to entities established for this purpose by the funding entities. In accordance with accounting standards, the trade accounts receivable amounts under the program are reported as pledged balances, and the related funding amounts are reported as short-term borrowings.

The maximum funding amount currently available under the program is $350 million. Program funding increased from $104 million at December 31, 2011 to $184 million at September 30, 2012. Under the terms of the program, available funding at September 30, 2012 was reduced by $37 million of customer deposits held by the originator because TCEH's credit ratings were lower than Ba3/BB-.

All new trade receivables under the program generated by the originator are continuously purchased by TXU Receivables Company with the proceeds from collections of receivables previously purchased. Ongoing changes in the amount of funding under the program, through changes in the amount of undivided interests sold by TXU Receivables Company, reflect seasonal variations in the level of accounts receivable, changes in collection trends and other factors such as changes in sales prices and volumes. TXU Receivables Company has issued a subordinated note payable to the originator for the difference between the face amount of the uncollected accounts receivable purchased, less a discount, and cash paid to the originator that was funded by the sale of the undivided interests. The subordinated note issued by TXU Receivables Company is subordinated to the undivided interests of the funding entities in the purchased receivables. The balance of the subordinated note payable, which is eliminated in consolidation, totaled $410 million and $420 million at September 30, 2012 and December 31, 2011, respectively.

The discount from face amount on the purchase of receivables from the originator principally funds program fees paid to the funding entities. The program fees consist primarily of interest costs on the underlying financing and are reported as interest expense and related charges. The discount also funds a servicing fee, which is reported as SG&A expense, paid by TXU Receivables Company to EFH Corporate Services Company (Service Co.), a direct wholly-owned subsidiary of EFH Corp., which provides recordkeeping services and is the collection agent for the program.

Program fee amounts were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Program fees
$
2

 
$
2

 
$
6

 
$
6

Program fees as a percentage of average funding (annualized)
4.9
%
 
4.4
%
 
6.2
%
 
6.1
%

Activities of TXU Receivables Company were as follows:
 
Nine Months Ended September 30,
 
2012
 
2011
Cash collections on accounts receivable
$
3,501

 
$
3,836

Face amount of new receivables purchased
(3,571
)
 
(3,955
)
Discount from face amount of purchased receivables
8

 
8

Program fees paid to funding entities
(6
)
 
(6
)
Servicing fees paid to Service Co. for recordkeeping and collection services
(2
)
 
(2
)
Increase (decrease) in subordinated notes payable
(10
)
 
4

Cash flows provided to originator under the program
$
(80
)
 
$
(115
)


12


The program, which expires in October 2013, may be terminated upon the occurrence of a number of specified events, including if the delinquency ratio (delinquent for 31 days) for the sold receivables, the default ratio (delinquent for 91 days or deemed uncollectible), the dilution ratio (reductions for discounts, disputes and other allowances) or the days outstanding ratio exceed stated thresholds, unless the funding entities waive such events of termination. The thresholds apply to the entire portfolio of sold receivables. In addition, the program may be terminated if TXU Receivables Company or Service Co. defaults in any payment with respect to debt in excess of $50,000 in the aggregate for such entities, or if TCEH, any affiliate of TCEH acting as collection agent other than Service Co., any parent guarantor of the originator or the originator defaults in any payment with respect to debt (other than hedging obligations) in excess of $200 million in the aggregate for such entities. At September 30, 2012, there were no such events of termination.

If the program was terminated, TCEH's liquidity would be reduced because collections of sold receivables would be used by TXU Receivables Company to repurchase the undivided interests from the funding entities instead of purchasing new receivables. We expect that the level of cash flows would normalize in approximately 16 to 30 days following termination.

Trade Accounts Receivable
 
September 30,
2012
 
December 31, 2011
Wholesale and retail trade accounts receivable, including $594 and $524 in pledged retail receivables
$
838

 
$
794

Allowance for uncollectible accounts
(15
)
 
(27
)
Trade accounts receivable — reported in balance sheet
$
823

 
$
767


Gross trade accounts receivable at September 30, 2012 and December 31, 2011 included unbilled revenues of $269 million and $269 million, respectively.

Allowance for Uncollectible Accounts Receivable
 
Nine Months Ended September 30,
 
2012
 
2011
Allowance for uncollectible accounts receivable at beginning of period
$
27

 
$
64

Increase for bad debt expense
20

 
42

Decrease for account write-offs
(32
)
 
(47
)
Reversal of reserve related to counterparty bankruptcy (Note 14)

 
(26
)
Allowance for uncollectible accounts receivable at end of period
$
15

 
$
33


13



6.
SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Short-Term Borrowings

At September 30, 2012, outstanding short-term borrowings totaled $469 million, which included $285 million under the TCEH Revolving Credit Facility at a weighted average interest rate of 4.41%, excluding customary fees, and $184 million under the accounts receivable securitization program discussed in Note 5.

At December 31, 2011, outstanding short-term borrowings totaled $774 million, which included $670 million under the TCEH Revolving Credit Facility at a weighted average interest rate of 4.46%, excluding certain customary fees, and $104 million under the accounts receivable securitization program.

Credit Facilities

Credit facilities with cash borrowing and/or letter of credit availability at September 30, 2012 are presented below. The facilities are all senior secured facilities of TCEH.
 
 
 
September 30, 2012
Facility
Maturity
Date
 
Facility
Limit
 
Letters of
Credit
 
Cash
Borrowings
 
Availability
TCEH Revolving Credit Facility (a)
October 2013
 
$
645

 
$

 
$
90

 
$
555

TCEH Revolving Credit Facility (a)
October 2016
 
1,409

 

 
195

 
1,214

TCEH Letter of Credit Facility (b)
October 2017 (b)
 
1,062

 

 
1,062

 

Subtotal TCEH
 
 
$
3,116

 
$

 
$
1,347

 
$
1,769

TCEH Commodity Collateral Posting Facility (c)
December 2012
 
Unlimited

 
$

 
$

 
Unlimited

___________
(a)
Facility used for letters of credit and borrowings for general corporate purposes. Borrowings are classified as short-term borrowings. At September 30, 2012, borrowings under the facility maturing October 2013 bear interest at LIBOR plus 3.50%, and a commitment fee is payable quarterly in arrears at a rate per annum equal to 0.50% of the average daily unused portion of the facility. At September 30, 2012, borrowings under the facility maturing October 2016 bear interest at LIBOR plus 4.50%, and a commitment fee is payable quarterly in arrears at a rate per annum equal to 1.00% of the average daily unused portion of the facility.
(b)
Facility, $42 million of which matures in October 2014, used for issuing letters of credit for general corporate purposes, including, but not limited to, providing collateral support under hedging arrangements and other commodity transactions that are not eligible for funding under the TCEH Commodity Collateral Posting Facility. The borrowings under this facility have been recorded by TCEH as restricted cash that supports issuances of letters of credit and are classified as long-term debt. At September 30, 2012, the restricted cash totaled $947 million, after reduction for a $115 million letter of credit drawn in 2009 related to an office building financing. At September 30, 2012, the restricted cash supports $682 million in letters of credit outstanding, leaving $265 million in available letter of credit capacity.
(c)
Revolving facility used to fund cash collateral posting requirements for specified volumes of natural gas hedges totaling approximately 20 million MMBtu at September 30, 2012. At September 30, 2012, there were no borrowings under this facility.


14


Long-Term Debt

At September 30, 2012 and December 31, 2011, long-term debt consisted of the following:
 
September 30,
2012
 
December 31, 2011
EFH Corp. (parent entity)
 
 
 
9.75% Fixed Senior Secured First Lien Notes due October 15, 2019
$
115

 
$
115

10% Fixed Senior Secured First Lien Notes due January 15, 2020
1,061

 
1,061

10.875% Fixed Senior Notes due November 1, 2017 (a)
196

 
196

11.25 / 12.00% Senior Toggle Notes due November 1, 2017 (a)
464

 
438

5.55% Fixed Series P Senior Notes due November 15, 2014 (a)
326

 
326

6.50% Fixed Series Q Senior Notes due November 15, 2024 (a)
740

 
740

6.55% Fixed Series R Senior Notes due November 15, 2034 (a)
744

 
744

8.82% Building Financing due semiannually through February 11, 2022 (b)
53

 
61

Unamortized fair value premium related to Building Financing (b)(c)
12

 
14

Capital lease obligations

 
1

Unamortized premium
6

 
6

Unamortized fair value discount (c)
(404
)
 
(430
)
Total EFH Corp.
3,313

 
3,272

EFIH
 
 
 
6.875% Fixed Senior Secured First Lien Notes due August 15, 2017
250

 

9.75% Fixed Senior Secured First Lien Notes due October 15, 2019
141

 
141

10% Fixed Senior Secured First Lien Notes due December 1, 2020
2,180

 
2,180

11% Fixed Senior Secured Second Lien Notes due October 1, 2021
406

 
406

11.75% Fixed Senior Secured Second Lien Notes due March 1, 2022
1,750

 

Unamortized premium
14

 

Unamortized discount
(11
)
 

Total EFIH
4,730

 
2,727

EFCH
 
 
 
9.58% Fixed Notes due in annual installments through December 4, 2019 (d)
41

 
41

8.254% Fixed Notes due in quarterly installments through December 31, 2021 (d)
39

 
43

1.245% Floating Rate Junior Subordinated Debentures, Series D due January 30, 2037 (e)
1

 
1

8.175% Fixed Junior Subordinated Debentures, Series E due January 30, 2037
8

 
8

Unamortized fair value discount (c)
(7
)
 
(8
)
Total EFCH
82

 
85

TCEH
 
 
 
Senior Secured Facilities:
 
 
 
3.757% TCEH Term Loan Facilities maturing October 10, 2014 (e)(f)
3,809

 
3,809

3.716% TCEH Letter of Credit Facility maturing October 10, 2014 (e)
42

 
42

0.181% TCEH Commodity Collateral Posting Facility maturing December 31, 2012 (g)

 

4.757% TCEH Term Loan Facilities maturing October 10, 2017 (a)(e)(f)
15,351

 
15,351

4.716% TCEH Letter of Credit Facility maturing October 10, 2017 (e)
1,020

 
1,020

11.5% Fixed Senior Secured Notes due October 1, 2020
1,750

 
1,750

15% Fixed Senior Secured Second Lien Notes due April 1, 2021
336

 
336

15% Fixed Senior Secured Second Lien Notes due April 1, 2021, Series B
1,235

 
1,235

10.25% Fixed Senior Notes due November 1, 2015 (a)
1,833

 
1,833

10.25% Fixed Senior Notes due November 1, 2015, Series B (a)
1,292

 
1,292

10.50 / 11.25% Senior Toggle Notes due November 1, 2016
1,656

 
1,568

 
 
 
 
 
 
 
 

15


 
September 30, 2012
 
December 31, 2011
Pollution Control Revenue Bonds:
 
 
 
Brazos River Authority:
 
 
 
5.40% Fixed Series 1994A due May 1, 2029
39

 
39

7.70% Fixed Series 1999A due April 1, 2033
111

 
111

6.75% Fixed Series 1999B due September 1, 2034, remarketing date April 1, 2013 (h)
16

 
16

7.70% Fixed Series 1999C due March 1, 2032
50

 
50

8.25% Fixed Series 2001A due October 1, 2030
71

 
71

8.25% Fixed Series 2001D-1 due May 1, 2033
171

 
171

0.178% Floating Series 2001D-2 due May 1, 2033 (i)
97

 
97

0.300% Floating Taxable Series 2001I due December 1, 2036 (j)
62

 
62

0.178% Floating Series 2002A due May 1, 2037 (i)
45

 
45

6.75% Fixed Series 2003A due April 1, 2038, remarketing date April 1, 2013 (h)
44

 
44

6.30% Fixed Series 2003B due July 1, 2032
39

 
39

6.75% Fixed Series 2003C due October 1, 2038
52

 
52

5.40% Fixed Series 2003D due October 1, 2029, remarketing date October 1, 2014 (h)
31

 
31

5.00% Fixed Series 2006 due March 1, 2041
100

 
100

Sabine River Authority of Texas:
 
 
 
6.45% Fixed Series 2000A due June 1, 2021
51

 
51

5.20% Fixed Series 2001C due May 1, 2028
70

 
70

5.80% Fixed Series 2003A due July 1, 2022
12

 
12

6.15% Fixed Series 2003B due August 1, 2022
45

 
45

Trinity River Authority of Texas:

 

6.25% Fixed Series 2000A due May 1, 2028
14

 
14

Unamortized fair value discount related to pollution control revenue bonds (c)
(114
)
 
(120
)
Other:
 
 
 
7.46% Fixed Secured Facility Bonds with amortizing payments through January 2015
12

 
28

7% Fixed Senior Notes due March 15, 2013
5

 
5

Capital leases
68

 
63

Other
3

 
3

Unamortized discount
(10
)
 
(11
)
Unamortized fair value discount (c)
(1
)
 
(1
)
Total TCEH
29,407

 
29,323

Total EFH Corp. consolidated
37,532

 
35,407

Less amount due currently
(104
)
 
(47
)
Total long-term debt
$
37,428

 
$
35,360

___________
(a)
Excludes the following debt that is held by EFIH or EFH Corp. (parent entity) and eliminated in consolidation:
 
September 30,
2012
 
December 31, 2011
EFH Corp. 10.875% Fixed Senior Notes due November 1, 2017
$
1,591

 
$
1,591

EFH Corp. 11.25 / 12.00% Senior Toggle Notes due November 1, 2017
2,951

 
2,784

EFH Corp. 5.55% Fixed Series P Senior Notes due November 15, 2014
45

 
45

EFH Corp. 6.50% Fixed Series Q Senior Notes due November 15, 2024
6

 
6

EFH Corp. 6.55% Fixed Series R Senior Notes due November 15, 2034
3

 
3

TCEH 4.757% Term Loan Facilities maturing October 10, 2017
19

 
19

TCEH 10.25% Fixed Senior Notes due November 1, 2015
213

 
213

TCEH 10.25% Fixed Senior Notes due November 1, 2015, Series B
150

 
150

Total
$
4,978

 
$
4,811


16


(b)
This financing is the obligation of a subsidiary of EFH Corp. (parent entity), is secured by a letter of credit and will be serviced with cash drawn by the beneficiary of the letter of credit.
(c)
Amount represents unamortized fair value adjustments recorded under purchase accounting.
(d)
EFCH's obligations with respect to these financings are guaranteed by EFH Corp. and secured on a first-priority basis by, among other things, an undivided interest in the Comanche Peak nuclear generation facility.
(e)
Interest rates in effect at September 30, 2012.
(f)
Interest rate swapped to fixed on $18.57 billion principal amount of maturities through October 2014 and up to an aggregate $12.6 billion principal amount from October 2014 through October 2017.
(g)
Interest rate in effect at September 30, 2012, excluding a quarterly maintenance fee of $11 million. See "Credit Facilities" above for more information.
(h)
These series are in the multiannual interest rate mode and are subject to mandatory tender prior to maturity on the mandatory remarketing date. On such date, the interest rate and interest rate period will be reset for the bonds.
(i)
Interest rates in effect at September 30, 2012. These series are in a daily interest rate mode and are classified as long-term as they are supported by long-term irrevocable letters of credit.
(j)
Interest rate in effect at September 30, 2012. This series is in a weekly interest rate mode and is classified as long-term as it is supported by long-term irrevocable letters of credit.

Debt Amounts Due Currently

Amounts due currently (within twelve months) at September 30, 2012 total $104 million and consist of $60 million principal amount of TCEH pollution control revenue bonds (PCRBs) subject to mandatory tender and remarketing in April 2013, which we expect to repurchase in April 2013, and $44 million of scheduled installment payments on capital leases and debt securities.

Debt Repayments

Repayments of long-term debt in the nine months ended September 30, 2012 totaled $31 million and consisted of $20 million of payments of principal at scheduled maturity dates and $11 million of contractual payments under capitalized lease obligations. In addition, short-term borrowings of $385 million under the TCEH Revolving Credit Facility were repaid.

Issuances of EFIH 6.875% Senior Secured Notes in 2012

In October 2012, EFIH and EFIH Finance issued $253 million principal amount of 6.875% Senior Secured Notes due 2017 (EFIH 6.875% Notes) with the proceeds used for general corporate purposes, which may include the payment of dividends to EFH Corp. The offering was issued at a premium of $8 million, which will be amortized to interest expense over the life of the notes. In August 2012, EFIH and EFIH Finance issued $250 million principal amount of EFIH 6.875% Notes and $600 million principal amount of 11.75% Senior Secured Second Lien Notes due 2022 (EFIH 11.75% Notes). The EFIH 11.75% Notes are discussed further below. Of the net proceeds from the August 2012 issuances, $680 million was retained in cash and placed in escrow (and is reported as restricted cash in the balance sheet) to be dividended to EFH Corp. by January 2013, and EFH Corp. agreed to use the dividend and cash on hand to repay the balance of the demand notes payable by EFH Corp. to TCEH, which totaled $689 million at September 30, 2012.

The EFIH 6.875% Notes mature in August 2017, with interest payable in cash semiannually in arrears on February 15 and August 15, beginning February 15, 2013, at a fixed rate of 6.875% per annum. The EFIH 6.875% Notes are secured on a first-priority basis by EFIH's pledge of its 100% ownership of the membership interests in Oncor Holdings (the EFIH Collateral) on an equal and ratable basis with the EFIH 9.75% Notes, the EFIH 10% Notes and EFIH's guarantee of the EFH Corp. Secured Notes.

Until February 15, 2015, EFIH may redeem, with the net cash proceeds of certain equity offerings, up to 35% of the aggregate principal amount of the EFIH 6.875% Notes from time to time at a redemption price of 106.875% of the aggregate principal amount of the notes being redeemed, plus accrued interest. EFIH may redeem the notes at any time prior to February 15, 2015 at a price equal to 100% of their principal amount, plus accrued interest and the applicable premium as defined in the indenture governing the notes. EFIH may also redeem the notes, in whole or in part, at any time on or after February 15, 2015, at specified redemption prices, plus accrued interest. Upon the occurrence of a change of control (as described in the indenture governing the notes), EFIH must offer to repurchase the notes at 101% of their principal amount, plus accrued interest.


17


The EFIH 6.875% Notes were issued in private placements and are not registered under the Securities Act. EFIH has agreed to use its commercially reasonable efforts to register with the SEC notes having substantially identical terms as the EFIH 6.875% Notes (except for provisions relating to transfer restrictions and payment of additional interest) as part of an offer to exchange freely tradable notes for the EFIH 6.875% Notes. If the registration statement has not been filed and declared effective within 365 days after the date the initial EFIH 6.875% Notes were issued (a Registration Default), the annual interest rate on the notes will increase by 25 basis points for the first 90-day period during which a Registration Default continues, and thereafter, the annual interest rate on the notes will increase by 50 basis points for the remaining period during which the Registration Default continues. If the Registration Default is cured, the interest rate on the notes will revert to the original level.

Issuances of EFIH 11.75% Senior Secured Second Lien Notes in 2012

In February and August 2012, EFIH and EFIH Finance issued $1.150 billion and $600 million principal amount of EFIH 11.75% Notes, respectively. The February 2012 offerings were issued at a discount of $12 million, and the August 2012 offering was issued at a premium of $14 million, both of which will be amortized to interest expense over the life of the notes. The net proceeds from the February 2012 issuance were used to pay a $950 million dividend to EFH Corp., and the balance was retained as cash on hand. EFH Corp. used the dividend to repay a portion of the demand notes payable by EFH Corp. to TCEH. TCEH used the majority of the $950 million to repay all borrowings under the TCEH Revolving Credit Facility.

The EFIH 11.75% Notes mature in March 2022, with interest payable in cash semiannually in arrears on March 1 and September 1 at a fixed rate of 11.75% per annum. The EFIH 11.75% Notes are secured on a second-priority basis by the EFIH Collateral on an equal and ratable basis with the EFIH 11% Notes. The EFIH 11.75% Notes have substantially the same covenants as the EFIH 11% Notes, and the holders of the EFIH 11.75% Notes will generally vote as a single class with the holders of the EFIH 11% Notes.

Until March 1, 2015, EFIH may redeem, with the net cash proceeds of certain equity offerings, up to 35% of the aggregate principal amount of the EFIH 11.75% Notes from time to time at a redemption price of 111.750% of the aggregate principal amount of the notes being redeemed, plus accrued interest. EFIH may redeem the notes at any time prior to March 1, 2017 at a price equal to 100% of their principal amount, plus accrued interest and the applicable premium as defined in the indenture governing the notes. EFIH may also redeem the notes, in whole or in part, at any time on or after March 1, 2017, at specified redemption prices, plus accrued interest. Upon the occurrence of a change of control (as described in the indenture governing the notes), EFIH must offer to repurchase the notes at 101% of their principal amount, plus accrued interest.

The EFIH 11.75% Notes were issued in private placements and are not registered under the Securities Act. EFIH has agreed to use its commercially reasonable efforts to register with the SEC notes having substantially identical terms as the EFIH 11.75% Notes (except for provisions relating to transfer restrictions and payment of additional interest) as part of an offer to exchange freely tradable notes for the EFIH 11.75% Notes. If the registration statement has not been filed and declared effective within 365 days after the date the initial EFIH 11.75% notes were issued (a Registration Default), the annual interest rate on the notes will increase by 25 basis points for the first 90-day period during which a Registration Default continues, and thereafter, the annual interest rate on the notes will increase by 50 basis points for the remaining period during which the Registration Default continues. If the Registration Default is cured, the interest rate on the notes will revert to the original level.

Information Regarding Other Significant Outstanding Debt

EFH Corp. 9.75% Notes and EFIH 9.75% Notes — At September 30, 2012, the principal amounts of the EFH Corp. 9.75% Notes and EFIH 9.75% Notes totaled $115 million and $141 million, respectively. The notes mature in October 2019, with interest payable in cash semi-annually in arrears on April 15 and October 15 at a fixed rate of 9.75% per annum. The EFH Corp. 9.75% Notes are fully and unconditionally guaranteed on a joint and several basis by EFCH and EFIH. The guarantee from EFIH is secured by the EFIH Collateral. The guarantee from EFCH is not secured. The EFIH 9.75% Notes are not guaranteed but are secured by the EFIH Collateral on an equal and ratable basis with the EFIH 6.875% Notes, the EFIH 10% Notes and EFIH's guarantee of the EFH Corp. 10% Notes and the EFH Corp. 9.75% Notes.


18


The EFH Corp. 9.75% Notes and EFIH 9.75% Notes are senior obligations of each issuer and rank equally in right of payment with all senior indebtedness of each issuer and are senior in right of payment to any future subordinated indebtedness of each issuer. The EFH Corp. 9.75% Notes are effectively subordinated to any indebtedness of EFH Corp. secured by assets of EFH Corp. to the extent of the value of the assets securing such indebtedness and are structurally subordinated to all indebtedness and other liabilities of EFH Corp.'s non-guarantor subsidiaries. The EFIH guarantee of the EFH Corp. 9.75% Notes is effectively senior to all unsecured indebtedness of EFIH, to the extent of the value of the EFIH Collateral, and is effectively subordinated to any indebtedness of EFIH secured by assets of EFIH other than the EFIH Collateral, to the extent of the value of the assets securing such indebtedness. The EFIH 9.75% Notes are effectively senior to all unsecured indebtedness of EFIH, to the extent of the value of the EFIH Collateral, and are effectively subordinated to any indebtedness of EFIH secured by assets of EFIH other than the EFIH Collateral, to the extent of the value of such assets. Furthermore, the EFIH 9.75% Notes are structurally subordinated to all indebtedness and other liabilities of EFIH's subsidiaries (other than EFIH Finance), including Oncor Holdings and its subsidiaries.

EFH Corp. 10% Senior Secured Notes — At September 30, 2012, the principal amount of the EFH Corp. 10% Notes totaled $1.061 billion, and the notes mature in January 2020, with interest payable in cash semi-annually in arrears on January 15 and July 15 at a fixed rate of 10% per annum. The notes are fully and unconditionally guaranteed on a joint and several basis by EFCH and EFIH on the same basis as the EFH Corp. 9.75% Notes discussed above.

EFH Corp. 10.875% Senior Notes and 11.25/12.00% Senior Toggle Notes (collectively, EFH Corp. Senior Notes) — At September 30, 2012, the principal amount of the EFH Corp. Senior Notes totaled $660 million, excluding $4.542 billion principal amount held by EFIH, and the notes are fully and unconditionally guaranteed on a joint and several unsecured basis by EFCH and EFIH. The notes mature in November 2017, with interest payable in cash semi-annually in arrears on May 1 and November 1 at a fixed rate for the 10.875% Notes of 10.875% per annum and at a fixed rate for the Toggle Notes of 11.250% per annum for cash interest and 12.000% per annum for PIK Interest. For any interest period until November 1, 2012, EFH Corp. may elect to pay interest on the Toggle Notes (i) entirely in cash; (ii) by increasing the principal amount of the notes or by issuing new EFH Corp. Toggle Notes (PIK Interest); or (iii) 50% in cash and 50% in PIK Interest. Once EFH Corp. makes a PIK election, which it did effective with the May 2009 interest payment, the election is valid for each succeeding interest payment period until EFH Corp. revokes the election. EFH Corp. is not required to make an offer to repurchase the notes upon the occurrence of a change of control of EFH Corp.

TCEH Senior Secured Facilities Borrowings under the TCEH Senior Secured Facilities totaled $20.507 billion at September 30, 2012 and consisted of:

$3.809 billion of TCEH Term Loan Facilities maturing in October 2014 with interest payable at LIBOR plus 3.50%;
$15.351 billion of TCEH Term Loan Facilities maturing in October 2017 with interest payable at LIBOR plus 4.50%;
$42 million of cash borrowed under the TCEH Letter of Credit Facility maturing in October 2014 with interest payable at LIBOR plus 3.50% (see discussion under "Credit Facilities" above);
$1.020 billion of cash borrowed under the TCEH Letter of Credit Facility maturing in October 2017 with interest payable at LIBOR plus 4.50% (see discussion under "Credit Facilities" above), and
Amounts borrowed under the TCEH Revolving Credit Facility, which may be reborrowed from time to time until October 2013 with respect to $645 million of commitments and until October 2016 with respect to $1.409 billion of commitments, totaled $90 million and $195 million, respectively, at September 30, 2012.

The TCEH Commodity Collateral Posting Facility, under which there were no borrowings at September 30, 2012, will mature in December 2012.

Each of the loans described above that matures in 2016 or 2017 includes a "springing maturity" provision pursuant to which (i) in the event that more than $500 million aggregate principal amount of the TCEH 10.25% Notes due in 2015 (other than notes held by EFH Corp. or its controlled affiliates at March 31, 2011 to the extent held at the determination date as defined in the Credit Agreement) or more than $150 million aggregate principal amount of the TCEH Toggle Notes due in 2016 (other than notes held by EFH Corp. or its controlled affiliates at March 31, 2011 to the extent held as of the determination date as defined in the Credit Agreement), as applicable, remain outstanding as of 91 days prior to the maturity date of the applicable notes and (ii) TCEH's total debt to Adjusted EBITDA ratio (as defined in the TCEH Senior Secured Facilities) is greater than 6.00 to 1.00 at the applicable determination date, then the maturity date of the extended loans will automatically change to 90 days prior to the maturity date of the applicable notes.


19


Under the terms of the TCEH Senior Secured Facilities, the commitments of the lenders to make loans to TCEH are several and not joint. Accordingly, if any lender fails to make loans to TCEH, TCEH's available liquidity could be reduced by an amount up to the aggregate amount of such lender's commitments under the TCEH Senior Secured Facilities.

The TCEH Senior Secured Facilities are fully and unconditionally guaranteed jointly and severally on a senior secured basis by EFCH, and subject to certain exceptions, each existing and future direct or indirect wholly-owned US subsidiary of TCEH. The TCEH Senior Secured Facilities, along with the TCEH Senior Secured Notes and certain commodity hedging transactions and the interest rate swaps described under "TCEH Interest Rate Swap Transactions" below, are secured on a first priority basis by (i) substantially all of the current and future assets of TCEH and TCEH's subsidiaries who are guarantors of such facilities and (ii) pledges of the capital stock of TCEH and certain current and future direct or indirect subsidiaries of TCEH.

TCEH 11.5% Senior Secured Notes At September 30, 2012, the principal amount of the TCEH 11.5% Senior Secured Notes totaled $1.750 billion. The notes mature in October 2020, with interest payable in cash quarterly in arrears on January 1, April 1, July 1 and October 1, at a fixed rate of 11.5% per annum. The notes are fully and unconditionally guaranteed on a joint and several basis by EFCH and each subsidiary of TCEH that guarantees the TCEH Senior Secured Facilities (collectively, the Guarantors). The notes are secured, on a first-priority basis, by security interests in all of the assets of TCEH, and the guarantees are secured on a first-priority basis by all of the assets and equity interests held by the Guarantors, in each case, to the extent such assets and equity interests secure obligations under the TCEH Senior Secured Facilities (the TCEH Collateral), subject to certain exceptions and permitted liens.

The notes are (i) senior obligations and rank equally in right of payment with all senior indebtedness of TCEH, (ii) senior in right of payment to all existing or future unsecured and second-priority secured debt of TCEH to the extent of the value of the TCEH Collateral and (iii) senior in right of payment to any future subordinated debt of TCEH. These notes are effectively subordinated to all secured obligations of TCEH that are secured by assets other than the TCEH Collateral, to the extent of the value of the assets securing such obligations.

TCEH 15% Senior Secured Second Lien Notes (including Series B) At September 30, 2012, the principal amount of the TCEH 15% Senior Secured Second Lien Notes totaled $1.571 billion. These notes mature in April 2021, with interest payable in cash quarterly in arrears on January 1, April 1, July 1 and October 1 at a fixed rate of 15% per annum. The notes are fully and unconditionally guaranteed on a joint and several basis by EFCH and, subject to certain exceptions, each subsidiary of TCEH that guarantees the TCEH Senior Secured Credit Facilities. The notes are secured, on a second-priority basis, by security interests in all of the assets of TCEH, and the guarantees (other than the guarantee of EFCH) are secured on a second-priority basis by all of the assets and equity interests of all of the Guarantors other than EFCH (collectively, the Subsidiary Guarantors), in each case, to the extent such assets and security interests secure obligations under the TCEH Senior Secured Credit Facilities on a first-priority basis, subject to certain exceptions (including the elimination of the pledge of equity interests of any Subsidiary Guarantor to the extent that separate financial statements would be required to be filed with the SEC for such Subsidiary Guarantor under Rule 3-16 of Regulation S-X) and permitted liens. The guarantee from EFCH is not secured.

The notes are senior obligations of the issuer and rank equally in right of payment with all senior indebtedness of TCEH, are senior in right of payment to all existing or future unsecured debt of TCEH to the extent of the value of the TCEH Collateral (after taking into account any first-priority liens on the TCEH Collateral) and are senior in right of payment to any future subordinated debt of TCEH. These notes are effectively subordinated to TCEH's obligations under the TCEH Senior Secured Credit Facilities, the TCEH Senior Secured Notes and TCEH's commodity and interest rate hedges that are secured by a first-priority lien on the TCEH Collateral and any future obligations subject to first-priority liens on the TCEH Collateral, to the extent of the value of the TCEH Collateral, and to all secured obligations of TCEH that are secured by assets other than the TCEH Collateral, to the extent of the value of the assets securing such obligations.

TCEH 10.25% Senior Notes (including Series B) and 10.50/11.25% Senior Toggle Notes (collectively, the TCEH Senior Notes) At September 30, 2012, the principal amount of the TCEH Senior Notes totaled $4.781 billion, excluding $363 million aggregate principal amount held by EFH Corp. and EFIH, and the notes are fully and unconditionally guaranteed on a joint and several unsecured basis by TCEH's direct parent, EFCH (which owns 100% of TCEH), and by each subsidiary that guarantees the TCEH Senior Secured Facilities. The TCEH 10.25% Notes mature in November 2015, with interest payable in cash semi-annually in arrears on May 1 and November 1 at a fixed rate of 10.25% per annum. The TCEH Toggle Notes mature in November 2016, with interest payable semi-annually in arrears on May 1 and November 1 at a fixed rate of 10.50% per annum for cash interest and at a fixed rate of 11.25% per annum for PIK Interest. For any interest period until November 2012, TCEH may elect to pay interest on the Toggle Notes (i) entirely in cash; (ii) by increasing the principal amount of the notes or by issuing new TCEH Toggle Notes (PIK Interest); or (iii) 50% in cash and 50% in PIK Interest. Once TCEH makes a PIK election, which it did effective with the May 2009 interest payment, the election is valid for each succeeding interest payment period until TCEH revokes the election.

20


EFIH 10% Senior Secured Notes — At September 30, 2012, the principal amount of the EFIH 10% Notes totaled $2.180 billion. The notes mature in December 2020, with interest payable in cash semiannually in arrears on June 1 and December 1 at a fixed rate of 10% per annum. The notes are secured by the EFIH Collateral on an equal and ratable basis with the EFIH 6.875% Notes, the EFIH 9.75% Notes and EFIH's guarantee of the EFH Corp. Senior Secured Notes as discussed above.

EFIH 11% Senior Secured Second Lien Notes — At September 30, 2012, the principal amount of the EFIH 11% Notes totaled $406 million. The notes mature in October 2021, with interest payable in cash semiannually in arrears on May 15 and November 15 at a fixed rate of 11% per annum. The EFIH 11% Notes are secured on a second-priority basis by the EFIH Collateral on an equal and ratable basis with the EFIH 11.75% Notes.

The notes were issued in a private placement and are not registered under the Securities Act. EFIH agreed to use its commercially reasonable efforts to register with the SEC notes having substantially identical terms as the EFIH 11% Notes (except for provisions relating to transfer restrictions and payment of additional interest) as part of an offer to exchange freely tradable notes for the EFIH 11% Notes, unless such notes meet certain transferability conditions (as described in the related registration rights agreement). The notes met the transferability conditions in March 2012 and became freely tradable.

Fair Value of Long-Term Debt

At September 30, 2012 and December 31, 2011, the estimated fair value of our long-term debt (excluding capital leases) totaled $25.832 billion and $23.402 billion, respectively, and the carrying amount totaled $37.464 billion and $35.343 billion, respectively. We determine fair value in accordance with accounting standards as discussed in Note 9 and at September 30, 2012 represents Level 2 valuations. We obtain security pricing from a vendor who uses broker quotes and third-party pricing services to determine fair values. Where relevant, these prices are validated through subscription services such as Bloomberg.

TCEH Interest Rate Swap Transactions

TCEH employs interest rate swaps to hedge exposure to its variable rate debt. As reflected in the table below, at September 30, 2012, TCEH has entered into the following series of interest rate swap transactions that effectively fix the interest rates at between 5.5% and 9.3%.
Fixed Rates
 
Expiration Dates
 
Notional Amount
5.5
%
-
9.3%
 
October 2012 through October 2014
 
 
$
18.57

billion (a)
 
6.8
%
-
9.0%
 
October 2015 through October 2017
 
 
$
12.60

billion (b)
 
___________
(a)
Swaps related to an aggregate $1.1 billion principal amount of debt expired in 2012. Per the terms of the transactions, the nominal amount of swaps entered into in 2011 grew by $1.02 billion, substantially offsetting the expired swaps.
(b)
These swaps are effective from October 2014 through October 2017. The $12.6 billion notional amount of swaps includes $3 billion that expires in October 2015 with the remainder expiring in October 2017.

TCEH has also entered into interest rate basis swap transactions that further reduce the fixed borrowing costs achieved through the interest rate swaps. Basis swaps in effect at September 30, 2012 totaled $15.92 billion notional amount, a decrease of $1.8 billion from December 31, 2011 reflecting new and expired swaps. The basis swaps relate to debt outstanding through 2014.

The interest rate swap counterparties are secured on an equal and ratable basis by the same collateral package granted to the lenders under the TCEH Senior Secured Facilities.

The interest rate swaps have resulted in net losses reported in interest expense and related charges as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Realized net loss
$
(168
)
 
$
(177
)
 
$
(505
)
 
$
(511
)
Unrealized net loss
(20
)
 
(619
)
 
(16
)
 
(879
)
Total
$
(188
)
 
$
(796
)
 
$
(521
)
 
$
(1,390
)

The cumulative unrealized mark-to-market net liability related to all TCEH interest rate swaps totaled $2.248 billion and $2.231 billion at September 30, 2012 and December 31, 2011, respectively, of which $67 million and $76 million (both pretax), respectively, were reported in accumulated other comprehensive income.

21



7.
COMMITMENTS AND CONTINGENCIES

Guarantees

We have entered into contracts that contain guarantees to unaffiliated parties that could require performance or payment under certain conditions. Material guarantees are discussed below.

Disposed TXU Gas Company operations In connection with the sale of TXU Gas Company to Atmos Energy Corporation (Atmos) in October 2004, EFH Corp. agreed to indemnify Atmos, until October 1, 2014, for up to $500 million for any liability related to assets retained by TXU Gas Company, including certain inactive gas plant sites not acquired by Atmos, and up to $1.4 billion for contingent liabilities associated with preclosing tax and employee related matters. The maximum aggregate amount under these indemnities that we may be required to pay is $1.9 billion. To date, we have not been required to make any payments to Atmos under any of these indemnity obligations, and no such payments are currently anticipated.

See Note 6 for discussion of guarantees and security for certain of our debt.

Letters of Credit

At September 30, 2012, TCEH had outstanding letters of credit under its credit facilities totaling $682 million as follows:

$270 million to support risk management and trading margin requirements in the normal course of business, including over-the-counter hedging transactions and collateral postings with ERCOT;
$208 million to support floating rate pollution control revenue bond debt with an aggregate principal amount of $204 million (the letters of credit are available to fund the payment of such debt obligations and expire in 2014);
$71 million to support TCEH's REP's financial requirements with the PUCT, and
$133 million for miscellaneous credit support requirements.

Litigation Related to Generation Facilities

In November 2010, an administrative appeal challenging the decision of the TCEQ to renew and amend Oak Grove Management Company LLC's (Oak Grove) (a wholly-owned subsidiary of TCEH) Texas Pollutant Discharge Elimination System (TPDES) permit related to water discharges was filed by Robertson County: Our Land, Our Lives and Roy Henrichson in the Travis County, Texas District Court. Plaintiffs sought a reversal of the TCEQ's order and a remand back to the TCEQ for further proceedings. Oral argument was held in this administrative appeal on October 23, 2012, and the court affirmed the TCEQ's issuance of the TPDES permit to Oak Grove. Plaintiffs may appeal the district court's decision to the appellate court within 30 days of entry of the court's order.

In addition to this administrative appeal, in November 2010, two other petitions were filed in Travis County, Texas District Court by Sustainable Energy and Economic Development Coalition (SEED) and Paul and Lisa Rolke, respectively, who were not parties to the administrative hearing before the State Office of Administrative Hearings, challenging the TCEQ's decision to renew and amend Oak Grove's TPDES permit and asking the District Court to remand the matter to the TCEQ for further proceedings. In January 2012, the court dismissed the petition filed by Paul and Lisa Rolke, and in March 2012, the court denied the Rolkes' motion for a new trial. The deadline for the Rolkes' to appeal the court's denial of their motion for a new trial has expired. Also, in March 2012, SEED voluntarily withdrew its petition without prejudice to refiling, and SEED's deadline for refiling has since expired. Accordingly, these two cases have been favorably resolved.

In January 2012, the Sierra Club filed a petition in Travis County, Texas District Court challenging the TCEQ's decision to issue permit amendments imposing limits on emissions during planned startup, shutdown and maintenance activities at Luminant's Big Brown, Monticello, Martin Lake and Sandow Unit 4 generation facilities. In July 2012, the Sierra Club voluntarily dismissed its challenge, with prejudice to refiling these claims in state court. Accordingly, this matter has been favorably resolved.


22


In September 2010, the Sierra Club filed a lawsuit in the US District Court for the Eastern District of Texas (Texarkana Division) against EFH Corp. and Luminant Generation Company LLC (a wholly-owned subsidiary of TCEH) for alleged violations of the Clean Air Act (CAA) at Luminant's Martin Lake generation facility. In May 2012, the Sierra Club filed a lawsuit in the US District Court for the Western District of Texas (Waco Division) against EFH Corp. and Luminant Generation Company LLC for alleged violations of the CAA at Luminant's Big Brown generation facility. The courts have scheduled these cases for trial in the summer of 2013. While we are unable to estimate any possible loss or predict the outcome, we believe that the Sierra Club's claims are without merit, and we intend to vigorously defend these lawsuits. In addition, in December 2010 and again in October 2011, the Sierra Club informed Luminant that it may sue Luminant for allegedly violating CAA provisions in connection with Luminant's Monticello generation facility. In May 2012, the Sierra Club informed us that it may sue us for allegedly violating CAA provisions in connection with Luminant's Sandow 4 generation facility. While we cannot predict whether the Sierra Club will actually file suit regarding Monticello or Sandow 4 or the outcome of any resulting proceedings, we believe we have complied with the requirements of the CAA at all of our generation facilities.

See below for discussion of litigation regarding the CSAPR and the Texas State Implementation Plan.

Regulatory Reviews

In June 2008, the EPA issued an initial request for information to TCEH under the EPA's authority under Section 114 of CAA. The stated purpose of the request is to obtain information necessary to determine compliance with the CAA, including New Source Review Standards and air permits issued by the TCEQ for the Big Brown, Monticello and Martin Lake generation facilities. Historically, as the EPA has pursued its New Source Review enforcement initiative, companies that have received a large and broad request under Section 114, such as the request received by TCEH, have in many instances subsequently received a notice of violation from the EPA, which has in some cases progressed to litigation or settlement. In July 2012, the EPA sent us a notice of violation alleging noncompliance with the CAA's New Source Review Standards and the air permits at our Martin Lake and Big Brown generation facilities. While we cannot predict whether the EPA will initiate enforcement proceedings under the notice of violation, we believe that we have complied with all requirements of the CAA at all of our generation facilities. We cannot predict the outcome of any resulting enforcement proceedings or estimate the penalties that might be assessed in connection with any such proceedings. In September 2012, we filed a petition for review in the United States Court of Appeals for the Fifth Circuit (Fifth Circuit Court) seeking judicial review of the EPA's notice of violation. Given recent legal precedent subjecting agency orders like the notice of violation to judicial review, we filed the petition for review to preserve our ability to challenge the EPA's issuance of the notice and its defects. In October 2012, the EPA filed a motion to dismiss our petition. We cannot predict the outcome of these proceedings.

Cross-State Air Pollution Rule (CSAPR)

In July 2011, the EPA issued the CSAPR, compliance with which would have required significant additional reductions of sulfur dioxide (SO2) and nitrogen oxides (NOx) emissions from our fossil-fueled generation units. In September 2011, we filed a petition for review in the US Court of Appeals for the District of Columbia Circuit (D.C. Circuit Court) challenging the CSAPR as it applies to Texas. If the CSAPR had taken effect, it would have caused us to, among other actions, idle two lignite/coal-fueled generation units and cease certain lignite mining operations by the end of 2011.

In February 2012, the EPA released a final rule (Final Revisions) and a proposed rule revising certain aspects of the CSAPR, including increases in the emissions budgets for Texas and our generation assets as compared to the July 2011 version of the rule. In March 2012, we submitted comments to the EPA on the proposed rule requesting the EPA to make additional corrections to the CSAPR's budgets for Texas. In April 2012, we filed in the D.C. Circuit Court a petition for review of the Final Revisions on the ground, among others, that the rules do not include all of the budget corrections we requested from the EPA. The parties to the case have agreed that the case should be held in abeyance pending the issuance of the mandate in the CSAPR proceeding. The mandate will issue seven days after the rehearing proceeding is concluded in the D.C. Circuit Court. In June 2012, the EPA finalized the proposed rule (Second Revised Rule). As compared to the proposed revisions to the CSAPR issued by the EPA in October 2011, these recent rules finalize emissions budgets for our generation assets that are approximately 6% lower for SO2, 3% higher for annual NOx and 2% higher for seasonal NOx.

In August 2012, a three judge panel of the D.C. Circuit Court vacated the CSAPR, remanding it to the EPA for further proceedings. As a result, the CSAPR, the Final Revisions and the Second Revised Rule do not impose any immediate requirements on us, the State of Texas, or other affected parties. The D.C. Circuit Court's order stated that the EPA was expected to continue administering the CAIR (the predecessor rule to the CSAPR) pending the EPA's further consideration of the rule. In October 2012, the EPA and certain other parties that supported the CSAPR filed a petition with the D.C. Circuit Court seeking review by the full court of the panel's decision to vacate and remand the CSAPR. We cannot predict when or how the D.C. Circuit Court will rule on this petition.

23


State Implementation Plan (SIP)

In September 2010, the EPA disapproved a portion of the State Implementation Plan pursuant to which the TCEQ implements its program to achieve the requirements of the Clean Air Act. The EPA disapproved the Texas standard permit for pollution control projects. We hold several permits issued pursuant to the TCEQ standard permit conditions for pollution control projects. We challenged the EPA's disapproval by filing a lawsuit in the US Court of Appeals for the Fifth Circuit (Fifth Circuit Court) arguing that the TCEQ's adoption of the standard permit conditions for pollution control projects was consistent with the Clean Air Act. In March 2012, the Fifth Circuit Court vacated the EPA's disapproval of the Texas standard permit for pollution control projects and remanded the matter to the EPA for reconsideration. We cannot predict the timing or outcome of the EPA's reconsideration.

In November 2010, the EPA disapproved a different portion of the SIP under which the TCEQ had been phasing out a long-standing exemption for certain emissions that unavoidably occur during startup, shutdown and maintenance activities and replacing that exemption with a more limited affirmative defense that will itself be phased out and replaced by TCEQ-issued generation facility-specific permit conditions. We, like many other electricity generation facility operators in Texas, have asserted applicability of the exemption or affirmative defense, and the TCEQ has not objected to that assertion. We have also applied for and received the generation facility-specific permit amendments. We challenged the EPA's disapproval by filing a lawsuit in the Fifth Circuit Court arguing that the TCEQ's adoption of the affirmative defense and phase-out of that affirmative defense as permits are issued is consistent with the Clean Air Act. In July 2012, the Fifth Circuit Court denied our challenge and ruled that the EPA's actions were in accordance with the Clean Air Act. In September 2012, we filed a petition with the Fifth Circuit Court seeking rehearing asking for review by the full Fifth Circuit Court of the panel's decision. On October 12, 2012, the Fifth Circuit Court panel withdrew its original opinion and issued a new expanded opinion that again upheld the EPA's disapproval. Parties may seek rehearing within 45 days after issuance of the new opinion. We cannot predict the timing or outcome of this matter.

Other Matters

We are involved in various legal and administrative proceedings in the normal course of business, the ultimate resolutions of which, in the opinion of management, are not anticipated to have a material effect on our results of operations, liquidity or financial condition.

24



8.
EQUITY

Dividend Restrictions

EFH Corp. has not declared or paid any dividends since the Merger.

The indentures governing the EFH Corp. Senior Notes and EFH Corp. Senior Secured Notes include covenants that, among other things and subject to certain exceptions, restrict our ability to pay dividends or make other distributions in respect of our common stock. Accordingly, our net income is restricted from being used to make distributions on our common stock unless such distributions are expressly permitted under these indentures and/or on a pro forma basis, after giving effect to such distribution, EFH Corp.'s consolidated leverage ratio is equal to or less than 7.0 to 1.0. For purposes of this calculation, "consolidated leverage ratio" is defined as the ratio of consolidated total debt (as defined in the indenture) to Adjusted EBITDA, in each case, consolidated with its subsidiaries other than Oncor Holdings and its subsidiaries. EFH Corp.'s consolidated leverage ratio was 9.6 to 1.0 at September 30, 2012.

The indentures governing the EFIH Notes generally restrict EFIH from making any cash distribution to EFH Corp. for the ultimate purpose of making a cash dividend on our common stock unless at the time, and after giving effect to such dividend, EFIH's consolidated leverage ratio is equal to or less than 6.0 to 1.0. Under the indentures governing the EFIH Notes, the term "consolidated leverage ratio" is defined as the ratio of EFIH's consolidated total debt (as defined in the indentures) to EFIH's Adjusted EBITDA on a consolidated basis (including Oncor's Adjusted EBITDA). EFIH's consolidated leverage ratio was 6.3 to 1.0 at September 30, 2012. In addition, the EFIH Notes generally restrict EFIH's ability to make distributions or loans to EFH Corp., unless such distributions or loans are expressly permitted under the indentures governing the EFIH Notes.

The TCEH Senior Secured Facilities generally restrict TCEH from making any cash distribution to any of its parent companies for the ultimate purpose of making a cash dividend on our common stock unless at the time, and after giving effect to such dividend, its consolidated total debt (as defined in the TCEH Senior Secured Facilities) to Adjusted EBITDA would be equal to or less than 6.5 to 1.0. At September 30, 2012, the ratio was 8.2 to 1.0.

In addition, the TCEH Senior Secured Facilities and indentures governing the TCEH Senior Notes, TCEH Senior Secured Notes and TCEH Senior Secured Second Lien Notes generally restrict TCEH's ability to make distributions or loans to any of its parent companies, EFCH and EFH Corp., unless such distributions or loans are expressly permitted under the TCEH Senior Secured Facilities and the indentures governing such notes.

In addition, under applicable law, we are prohibited from paying any dividend to the extent that immediately following payment of such dividend, there would be no statutory surplus or we would be insolvent.

Noncontrolling Interests

As discussed in Note 3, we consolidate a joint venture formed in 2009 for the purpose of developing two new nuclear generation units, which results in a noncontrolling interests component of equity. Net loss attributable to the noncontrolling interests was immaterial in the nine months ended September 30, 2012 and 2011.


25


Equity

The following table presents the changes to equity in the nine months ended September 30, 2012.
 
EFH Corp. Shareholders’ Equity
 
 
 
 
 
Common Stock (a)
 
Additional Paid-in Capital
 
Retained Earnings (Deficit)
 
Accumulated Other Comprehensive Income (Loss)
 
Noncontrolling Interests
 
Total Equity
Balance at December 31, 2011
$
2

 
$
7,947

 
$
(15,579
)
 
$
(222
)
 
$
95

 
$
(7,757
)
Net loss

 

 
(1,408
)
 

 

 
(1,408
)
Effects of stock-based incentive compensation plans

 
11

 

 

 

 
11

Change in unrecognized losses related to pension and OPEB plans (Note 11)

 

 

 
(25
)
 

 
(25
)
Net effects of cash flow hedges

 

 

 
5

 

 
5

Net effects of cash flow hedges – Oncor (b)

 

 

 
2

 

 
2

Investment by noncontrolling interests

 

 

 

 
6

 
6

Balance at September 30, 2012
$
2

 
$
7,958

 
$
(16,987
)
 
$
(240
)
 
$
101

 
$
(9,166
)
____________
(a)
Authorized shares totaled 2,000,000,000 at September 30, 2012. Outstanding shares totaled 1,680,539,245 and 1,679,539,245 at September 30, 2012 and December 31, 2011, respectively.
(b)
Represents recognition in equity in earnings of unconsolidated subsidiaries of previous losses on interest rate hedge transactions entered into by Oncor.

The following table presents the changes to equity in the nine months ended September 30, 2011.
 
EFH Corp. Shareholders’ Equity
 
 
 
 
 
Common Stock (a)
 
Additional Paid-in Capital
 
Retained Earnings (Deficit)
 
Accumulated Other Comprehensive Income (Loss)
 
Noncontrolling Interests
 
Total Equity
Balance at December 31, 2010
$
2

 
$
7,937

 
$
(13,666
)
 
$
(263
)
 
$
79

 
$
(5,911
)
Net loss

 

 
(1,776
)
 

 

 
(1,776
)
Effects of stock-based incentive compensation plans

 
4

 

 

 

 
4

Change in unrecognized losses related to pension and OPEB plans

 

 

 
16

 

 
16

Net effects of cash flow hedges

 

 

 
15

 

 
15

Net effects of cash flow hedges – Oncor (b)

 

 

 
(24
)
 

 
(24
)
Investment by noncontrolling interests

 

 

 

 
13

 
13

Other

 
(1
)
 

 

 

 
(1
)
Balance at September 30, 2011
$
2

 
$
7,940

 
$
(15,442
)
 
$
(256
)
 
$
92

 
$
(7,664
)
____________
(a)
Authorized shares totaled 2,000,000,000 at September 30, 2011. Outstanding shares totaled 1,675,588,195 and 1,671,812,118 at September 30, 2011 and December 31, 2010, respectively.
(b)
Represents losses on interest rate hedge transactions entered into by Oncor.

26



9.
FAIR VALUE MEASUREMENTS

Accounting standards related to the determination of fair value define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use a "mid-market" valuation convention (the mid-point price between bid and ask prices) as a practical expedient to measure fair value for the majority of our assets and liabilities subject to fair value measurement on a recurring basis. We primarily use the market approach for recurring fair value measurements and use valuation techniques to maximize the use of observable inputs and minimize the use of unobservable inputs.

We categorize our assets and liabilities recorded at fair value based upon the following fair value hierarchy:

Level 1 valuations use quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. An active market is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Our Level 1 assets and liabilities include exchange-traded commodity contracts. For example, a significant number of our derivatives are NYMEX futures and swaps transacted through clearing brokers for which prices are actively quoted.

Level 2 valuations use inputs that, in the absence of actively quoted market prices, are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: (a) quoted prices for similar assets or liabilities in active markets, (b) quoted prices for identical or similar assets or liabilities in markets that are not active, (c) inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves observable at commonly quoted intervals and (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means. Our Level 2 valuations utilize over-the-counter broker quotes, quoted prices for similar assets or liabilities that are corroborated by correlations or other mathematical means and other valuation inputs. For example, our Level 2 assets and liabilities include forward commodity positions at locations for which over-the-counter broker quotes are available.

Level 3 valuations use unobservable inputs for the asset or liability. Unobservable inputs are used to the extent observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. We use the most meaningful information available from the market combined with internally developed valuation methodologies to develop our best estimate of fair value. For example, our Level 3 assets and liabilities include certain derivatives whose values are derived from pricing models that utilize multiple inputs to the valuations, including inputs that are not observable or easily corroborated through other means. See further discussion below.

Our valuation policies and procedures are developed, maintained and validated by a centralized risk management group that reports to the Chief Financial Officer, who also functions as the Chief Risk Officer. Risk management functions include valuation model validation, risk analytics, risk control, credit risk management and risk reporting.

We utilize several different valuation techniques to measure the fair value of assets and liabilities, relying primarily on the market approach of using prices and other market information for identical and/or comparable assets and liabilities for those items that are measured on a recurring basis. These methods include, among others, the use of broker quotes and statistical relationships between different price curves.

In utilizing broker quotes, we attempt to obtain multiple quotes from brokers that are active in the commodity markets in which we participate (and require at least one quote from two brokers to determine a pricing input as observable); however, not all pricing inputs are quoted by brokers. The number of broker quotes received for certain pricing inputs varies depending on the depth of the trading market, each individual broker's publication policy, recent trading volume trends and various other factors. In addition, for valuation of interest rate swaps, we use a combination of dealer provided market valuations (generally non-binding) and standard rate swap valuation models utilizing month-end interest rate curves.

Certain derivatives and financial instruments are valued utilizing option pricing models that take into consideration multiple inputs including commodity prices, volatility factors, discount rates and other inputs. Additionally, when there is not a sufficient amount of observable market data, valuation models are developed that incorporate proprietary views of market factors. Significant unobservable inputs used to develop the valuation models include volatility curves, correlation curves, illiquid pricing locations and credit/non-performance risk assumptions. Those valuation models are generally used in developing long-term forward price curves for certain commodities. We believe the development of such curves is consistent with industry practice; however, the fair value measurements resulting from such curves are classified as Level 3.

27


The significant unobservable inputs and valuation models are developed by employees trained and experienced in market operations and fair value measurement and validated by the company's risk management group, which also further analyzes any significant changes in Level 3 measurements. Significant changes in the unobservable inputs could result in significant upward or downward changes in the fair value measurement.

With respect to amounts presented in the following fair value hierarchy tables, the fair value measurement of an asset or liability (e.g., a contract) is required to fall in its entirety in one level, based on the lowest level input that is significant to the fair value measurement. Certain assets and liabilities would be classified in Level 2 instead of Level 3 of the hierarchy except for the effects of credit reserves and non-performance risk adjustments, respectively. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability being measured.

At September 30, 2012, assets and liabilities measured at fair value on a recurring basis consisted of the following:
 
Level 1
 
Level 2
 
Level 3 (a)
 
Reclassification (b)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Commodity contracts
$
245

 
$
2,152

 
$
71

 
$
65

 
$
2,533

Interest rate swaps

 
144